Financial access

One obstacle hampering economic growth in Africas most poverty-stricken regions is a widespread lack of finance. Roughly four billion people in developing nations are without basic financial services such as saving, credit and insurance.

The reasons for this illustrate the circular nature of this poverty trap. To raise agricultural productivity and diversify and increase their incomes, poor people need investment credit and working capital. Because the amounts involved are small and poor people lack collateral, banks are usually not interested in lending to them.

Various studies have reached the unsurprising conclusion that strong economic growth coincides with a substantial reduction in poverty. But there is also a tendency for growth to increase inequality of income distribution. This highlights the need to combine efforts to accelerate economic growth by further developing business and human resource capacities, and creating a balance between rural and urban progress.

Access to finance is key
Even though they have little, the poor do save money and their need for basic financial services is significant. But often these savings are set aside in non-financial forms, since suitable savings institutions and instruments are not available.

Moreover, confidence in the financial system is generally lacking because of low stability and high inflation. Micro-enterprises, as well as SMEs, need investment and working capital to start or expand their business activity. They face many of the same hurdles as poor individuals when trying to attract formal financial services:

Constraints on financial services in rural areas

• Dispersed demand due to reduced economic activity and low population density
• High costs due to poor infrastructure
• Competition from subsidized or directed credit projects by state-owned banks or donors
• Seasonal returns result in variable demand and uneven cash flow
• Farming related risks - weather, pestilence, price fluctuations, etc.
  

Targets for improvement
To increase financial access for the poor, a redefinition of the public and private sector roles is critical. According to Rabobank, the world's leading specialist in food and agribusiness banking, banking should be left to specialist institutions; government should reduce its ownership role and focus on its agenda as infrastructure provider and regulator. As in direct agricultural projects, the aspects of sustainability and a healthy environment for the financial sector are essential.

The financial organizations, be they formal commercial banks, cooperatives, or micro-finance institutions, that take up the challenge of providing the access needed to begin reversing the poverty spiral will also need to develop sufficient scale in order to service clients as their needs evolve.